Frontier (ULCC)

Ultra low-cost airline Frontier Group Holdings (NASDAQ:ULCC) fell short of the markets revenue expectations in Q3 CY2025, with sales falling 5.2% year on year to $886 million. Its non-GAAP loss of $0.34 per share was 7.7% above analysts’ consensus estimates.

Company Overview

Recognizable for the colorful animals adorning each aircraft tail, Frontier Group Holdings (NASDAQ:ULCC) is an ultra low-cost airline that provides budget-friendly flights throughout the United States and select international destinations in the Americas.

Airlines, hotels, resorts, and cruise line companies often sell experiences rather than tangible products, and in the last decade-plus, consumers have slowly shifted from buying "things" (wasteful) to buying "experiences" (memorable). In addition, the internet has introduced new ways of approaching leisure and lodging such as booking homes and longer-term accommodations. Traditional airlines, hotel, resorts, and cruise line companies must innovate to stay relevant in a market rife with innovation.

Frontier's main competitors include other ultra low-cost carriers such as Spirit Airlines, Allegiant Travel Company, and Sun Country Airlines, as well as low-cost carrier Southwest Airlines. The company also competes with the major U.S. airlines including American Airlines, Delta Air Lines, and United Airlines on many domestic routes.

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Frontier grew its sales at a 17.9% compounded annual growth rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.

We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new property or trend. Frontier’s recent performance shows its demand has slowed as its annualized revenue growth of 1.7% over the last two years was below its five-year trend.

This quarter, Frontier missed Wall Street’s estimates and reported a rather uninspiring 5.2% year-on-year revenue decline, generating $886 million of revenue.

Looking ahead, sell-side analysts expect revenue to grow 10.6% over the next 12 months. Although this projection implies its newer products and services will fuel better top-line performance, it is still below the sector average.

Frontier’s operating margin has been trending down over the last 12 months and averaged negative 1.9% over the last two years. Unprofitable consumer discretionary companies with falling margins deserve extra scrutiny because they’re spending loads of money to stay relevant, an unsustainable practice.

Frontier’s operating margin was negative 8.7% this quarter. The company's consistent lack of profits raise a flag.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Although Frontier’s full-year earnings are still negative, it reduced its losses and improved its EPS by 8.7% annually over the last four years. The next few quarters will be critical for assessing its long-term profitability.

In Q3, Frontier reported adjusted EPS of negative $0.34, down from negative $0.05 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 7.7%. Over the next 12 months, Wall Street expects Frontier to improve its earnings losses. Analysts forecast its full-year EPS of negative $0.61 will advance to negative $0.15.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Over the last two years, Frontier’s demanding reinvestments to stay relevant have drained its resources, putting it in a pinch and limiting its ability to return capital to investors. Its free cash flow margin averaged negative 9.6%, meaning it lit $9.64 of cash on fire for every $100 in revenue.

Frontier burned through $217 million of cash in Q3, equivalent to a negative 24.5% margin. The company’s cash burn increased from $170 million of lost cash in the same quarter last year.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Frontier’s five-year average ROIC was negative 11.4%, meaning management lost money while trying to expand the business. Its returns were among the worst in the consumer discretionary sector.

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Frontier’s ROIC has increased. This is a good sign, but we recognize its lack of profitable growth during the COVID era was the primary reason for the change.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Frontier burned through $414 million of cash over the last year, and its $5.03 billion of debt exceeds the $566 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the Frontier’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of Frontier until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

We were impressed by Frontier’s optimistic EPS guidance for next quarter, which blew past analysts’ expectations. We were also glad its adjusted operating income outperformed Wall Street’s estimates. On the other hand, its EBITDA missed and its revenue fell short of Wall Street’s estimates. Zooming out, we think this was a mixed quarter. The stock remained flat at $4.59 immediately following the results.

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Frontier, you should also grasp the company’s longer-term business quality and valuation.

Frontier doesn’t pass our quality test. For starters, its revenue growth was weak over the last five years, and analysts expect its demand to deteriorate over the next 12 months. And while its projected EPS for the next year implies the company’s fundamentals will improve, the downside is its weak EPS growth over the last four years shows it’s failed to produce meaningful profits for shareholders. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Frontier’s EV-to-EBITDA ratio based on the next 12 months is 6.3x. While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $5.56 on the company (compared to the current share price of $4.59).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.